Landlords passing buy-to-let tax changes on to tenants, as rush to incorporate continues

10th June 2016

Tax and tax relief changes to buy-to-let mortgages has generated record demand for mortgages via companies in 2016 and will push up rents further, according to the fourth edition of Kent Reliance’s Buy To Let Britain report.

Landlords have rushed to incorporate in order to mitigate the impact of the tax changes announced in the Budget last summer which lowers the tax relief for mortgage interest payments for landlords from April 2017.

Borrowing through a company structure means investors are taxed on profits at lower corporation tax rates, and can offset all finance costs against rental income. Kent Reliance’s data shows mortgage applications via limited companies increased by over 80% in 2015 compared to 2014. In total, limited company loans accounted for more than one in five buy to let mortgages last year, nearly 55,000 across the buy to let whole market.

This demand has intensified in 2016. In the first three months of the year, just under 38,000 loans were issued to limited companies, nearly four times the number issued in the same period in 2015. Alongside landlords’ increasing demand for this type of finance, the overall numbers were supported by increased buy to let transactions in March as landlords hurried to complete purchases ahead of the introduction of a 3% stamp duty surcharge in April.

The rush to incorporate looks unlikely to subside. According to a survey of over 1,000 property investors, run in association with research firm BDRC Continental, a third of landlords are considering this move, and 7% have already done so. Kent Reliance estimates that limited company loans will total 98,400 in 2016, nearly 40% of the total number of buy to let loans, and nearly three times its share of the market in 2014.

Kent Reliance believes that the tax changes announced are also directly pushing up rents for tenants, as landlords offset the higher costs heaped on them by new taxes and regulations. In the last year, the average monthly rent has already risen by 3.5% to £872. Rents are set to rise further. Four in ten landlords expect to raise rents in the next six months, by an average of 5.6% (an average increase of around £49 per month for tenants). Three quarters of landlords increasing rents directly blame the impending sharp reduction in mortgage tax relief, meaning they are passing on the higher finance costs to tenants, while four in ten highlight strengthening tenant demand.

Increased taxation and regulation comes as the private rental sector continues to grow in size and importance. In Great Britain as a whole, more than quarter of a million new renting households were formed in the last year, increasing the total by 5.5%. The value of a rented home is also climbing, rising by an annual rate of 9% currently. As a result, the value of the sector has increased by £156bn in the last year to £1.2 trillion, making it more than half the size of the UK stock market and so highlighting its importance as an asset class.

Andy Golding, chief executive of OneSavings Bank, which trades under the Kent Reliance brand says: “The buy to let market now sits firmly in the crosshairs of both politicians and regulators, and we are seeing landlords react. Thousands hurried purchases to beat the stamp duty deadline, and the popularity of limited companies is soaring as investors seek to reduce tax exposure. But it is tenants who are feeling the real brunt. Rents are rising, and landlords will increase them further as they pass on the increased cost of running their businesses. Far from supporting tenants, recent intervention will see them bear a heavier financial burden.”

“Increasing landlords’ tax bills won’t alter the root cause of the UK’s housing crisis. As long as the demand for homes every year far outweighs the number of new houses, the only way to reduce the cost of housing in this country for tenants and first-timers alike is to build more. We need to see a paradigm shift, moving the focus from sustaining demand to expanding supply in all tenures.”

Methodology

Kent Reliance’s research team analysed ONS census, ONS population and English Housing Survey data to establish the regional weighting of the private rented sector, its size and growth rate. Rental property prices are based on the average differential between rental property and house price data from Land Registry and Registers of Scotland. Rental data incorporates figures taken from Citylets and yield data from LSL Property Services. All rental and property value data has been weighted to account for the changing regional composition of the private rented sector. Buy to let mortgage data is based on analysis of figures from the CML and ARLA. Unless otherwise stated, the data analysed is between the 2007 and the first quarter of 2016.

All survey data is based on a survey of 1,097 landlords, conducted by BDRC Continental in the first quarter of 2016.